Close to Roth IRA limit should I do Roth or Back door?

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Topic Author
Tarabara
Posts: 48
Joined: Tue Jul 03, 2012 6:44 pm

Close to Roth IRA limit should I do Roth or Back door?

Post by Tarabara »

By my calculations I think my spouse and I will be just under the Roth IRA limit of 181,000 MAGI but just by about $3,000. I have read all the wiki's and back door how-to's but still can't decide what to do. I would like to keep it simple and avoid the complication of doing IRA in one year and conversion in another, but if my calculations are off even a little I might end up having to recharacterize.
Here is some relevant info:
We are married filing jointly
We are both over 50
My spouse has been contributing to Roth IRA all through the year so if my calculation are off we will need to recharactierize that.
My spouse does have another traditional IRA we do not want to convert or roll over so she is not good candidate for doing back-door.
I do not have any other non-Roth IRAs. I have 401K and some inheritid IRAs which don't count so I can do back door w/out tax consequences

So, should I:

1. Contribute the $6500 to my Roth IRA this year. I like this because it is simple and it worked great last year (we were just under the limit then too.) When I do my taxes, if I discover that my estimates were wrong and we were over the limit I will have to recharacterize both my contribution and spouse's contribution. Then, could I do a Roth IRA conversion on my recharacterized in 2015 for 2014?? This seems complicated.

2. Or should I not even try to do a regular one and just do a back door Roth IRA contribution now in 2014 for me even though I very well may be under the limit? Then if we are over limit i will just need to recharactierize spouses's contribution?

Thanks for any input
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retiredjg
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Re: Close to Roth IRA limit should I do Roth or Back door?

Post by retiredjg »

I'd just go ahead and use the back door. There is no harm - you just have to do paperwork (front and back of Form 8606).

Seem's like Her situation is already set - you will be or will not be under the limit and will have to wait and see and re-characterize if necessary. Got any charitable donations you want to make earlier than planned?
:oops:
Last edited by retiredjg on Tue Dec 16, 2014 7:03 pm, edited 1 time in total.
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powermega
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Re: Close to Roth IRA limit should I do Roth or Back door?

Post by powermega »

Do you have any capital losses you can realize to help push down your income? Any charities you want to donate to? If you're right on the income limit for Roth, that might help you.

If you wanted to be extra careful about it, you could wait until early next year to make your IRA contribution (for tax year 2014), after you know what your exact income is for 2014. That way you can know if you can contribute to a Roth directly or go the "backdoor" route. If your income does go over the limit, you will have the headache of re-characterizing your spouse's contributions, and you will have the hassle of going through the backdoor early next year. The extra hassle with performing a backdoor Roth contribution that is applied to the previous calendar year is that your IRS 8606 form will have to be filed for the tax year of the contribution (2014), but the conversion to Roth will show up on your 2015 tax return's 8606. That messier 8606 is the reason why the backdoor contribution and conversion is usually recommended to occur in the same tax year. Again, totally legal, just extra paperwork. I hope you come in just under the limit and don't have the extra hassle of all this.
Even a stopped clock is right twice a day.
rkhusky
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Re: Close to Roth IRA limit should I do Roth or Back door?

Post by rkhusky »

retiredjg wrote: Got any charitable donations you want to make earlier than planned?
I don't think charitable donations affect the MAGI.
Alan S.
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Re: Close to Roth IRA limit should I do Roth or Back door?

Post by Alan S. »

Charitable contributions will only reduce taxable income, but not modified AGI used to determine if regular Roth contributions can be made. Capital losses however would reduce MAGI, but remember that your inherited IRA RMD will increase it.

I would make your contribution as a non deductible TIRA contribution and plan to convert it. That will make MAGI immaterial for you. However, your spouse will have 3 choices if MAGI makes the direct Roth contribution an excess contribution:
1) Removal with earnings - this works best if earnings are very small or there is a loss. If earnings are good, there will be a penalty as well as taxes on the removed earnings,
2) Recharacterize as non deductible TIRA and convert - depending on MAGI this could be either a partial or full recharacterization. Recharacterize only the minimum required and convert it, but because of other IRAs the conversion would be mostly taxable. But that is OK if the recharacterized amount is small due to MAGI in lower end of the phaseout range. Or it would also be OK if you would otherwise convert taxable amounts because you expect your retirement tax rate to be equal or higher than now.
3) Recharacterize as ND TIRA and leave it - may be useful if spouse can roll pre tax IRA balance into employer plan in future year, then convert the basis in that year.

To state the obvious - you are in a battle of simplicity vs best possible use of IRA space, so will have to compromise somewhere. For 2015 and beyond, because of spouse's situation, simplicity would dictate that spouse would wait to contribute for any year until after MAGI is calculated in the spring. You could do your ND contribution and convert early in the year.
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celia
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Re: Close to Roth IRA limit should I do Roth or Back door?

Post by celia »

I look at it as only a matter of time (this year, next year, following year) when you will be ineligible for Roth contributions. So you both should start making non-deductible contributions to a new, SEPARATE traditional account. A new, separate account will make it easier to identify which money was non-deductible and if a recharacterization is needed, it should go back to the same account the conversion came from. Also do Roth conversions into an empty (new) Roth account each year to facilitate later recharacterizations. (After you are sure the following year that the conversion will stay permanent, you can move the Roth money to your permanent Roth account and start the process all over.)
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
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retiredjg
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Re: Close to Roth IRA limit should I do Roth or Back door?

Post by retiredjg »

rkhusky wrote:
retiredjg wrote: Got any charitable donations you want to make earlier than planned?
I don't think charitable donations affect the MAGI.
Thanks for catching that. Edited. :happy
Topic Author
Tarabara
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Joined: Tue Jul 03, 2012 6:44 pm

Re: Close to Roth IRA limit should I do Roth or Back door?

Post by Tarabara »

Thanks all. Very helpful. A few more questions.

If I decide to wait until after I do my taxes in 2015:
If MAGI is under the limit I can do a regular Roth Contribution in 2015 for 2014. This I know and understand.

If MAGI is over the limit can I contribute to Traditional IRA in 2015 (for 2014) and also convert it in 2015 (for 2014)? Or is the contribution in 2015 for 2014 allowed but then the conversion in 2015 is for 2015. I bet that is the case, correct? And that is why it spans or carry's over through to next years tax return?

Can I contribute to the T IRA now in 2014 and then do the back door now in 2014? Would that be easier? Would I still have to carry over to next year's tax return?

If I have to recharacterize spouse's contribution to Roth IRA for 2014 how does that work? Is there a wiki another thread on recharacterization i could refer to?

Thank you thank you.
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retiredjg
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Re: Close to Roth IRA limit should I do Roth or Back door?

Post by retiredjg »

Tarabara wrote: Or is the contribution in 2015 for 2014 allowed but then the conversion in 2015 is for 2015. I bet that is the case, correct? And that is why it spans or carry's over through to next years tax return?
Correct. If you do both steps in January, you will report the contribution with the 2014 taxes you do in January - April, but the conversion will be reported the following year as a 2015 conversion. Don't depend on your memory - write yourself a note so that you don't forget to do it.
Can I contribute to the T IRA now in 2014 and then do the back door now in 2014? Would that be easier? Would I still have to carry over to next year's tax return?
If you do this, both steps will be reported on the 2014 taxes. Form 8606 front page gets the contribution and back page gets the conversion.

I can't help with the re-characterization part of your questions.
Bob's not my name
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Re: Close to Roth IRA limit should I do Roth or Back door?

Post by Bob's not my name »

celia wrote:I look at it as only a matter of time (this year, next year, following year) when you will be ineligible for Roth contributions.
Not necessarily. The income limit goes up a couple thousand every year, the 401k limits go up about $1,000/year for a couple over 50, and pre-tax insurance premiums go up too. All these factors make the MAGI limit a receding horizon. In addition, the OP has taxable assets and an inherited IRA, so there is opportunity for income bunching and tax loss harvesting. OP's spouse is about 56, so they might squeak under the threshold for his remaining working years. I've been surprised that I'm perennially just under the Roth income limit.
livesoft
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Re: Close to Roth IRA limit should I do Roth or Back door?

Post by livesoft »

We are waiting until 2015 to make our 2014 Roth IRA contributions. We will not know our total income until after December 31, 2014.

I do not see what your hurry is to make a Roth contribution in 2014 or even to try to do a traditional contribution in 2014. You have until April 2015 to figure this out. What's the rush?
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englishgirl
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Re: Close to Roth IRA limit should I do Roth or Back door?

Post by englishgirl »

livesoft wrote:We are waiting until 2015 to make our 2014 Roth IRA contributions. We will not know our total income until after December 31, 2014.

I do not see what your hurry is to make a Roth contribution in 2014 or even to try to do a traditional contribution in 2014. You have until April 2015 to figure this out. What's the rush?
+1, and recharacterizing is not that hard to do either. And if you end up in the phase out range where you could potentially only have, say $200 of IRA contributions that have to go in a traditional non-deductible, recharacterizing has (in my view) an advantage, in that Vanguard will open you an IRA just with that $200 you need to recharacterize (with the caveat that it has to go into the same fund that it was in previously). Then you can convert it or not as you wish. If your spouse has another traditional IRA and doesn't want to do the conversion of the full amount, it's just that $200 you're leaving in a trad non-deductible IRA. If you choose to do the backdoor Roth or open a traditional IRA to start with, you'll need a minimum investment of $1000 or $3000, depending on the fund, in order to open a new account.
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Topic Author
Tarabara
Posts: 48
Joined: Tue Jul 03, 2012 6:44 pm

Re: Close to Roth IRA limit should I do Roth or Back door?

Post by Tarabara »

Thank you so much for the additional answers. I think i finally get it now. I don't know why I was in such a rush but after reading the replys and thinking about it more I will wait until I do my taxes and then determine if I can do regular Roth IRA contribution or I need to do back door. Also, for next year my spouse will redirect the Roth contribution into a tax-free bond fund til the end of the year and if we are still under limit in 2015 then do a Roth IRA contribution when we do taxes. If over the limit we will invest that elsewhere.
Thanks everyone!
Topic Author
Tarabara
Posts: 48
Joined: Tue Jul 03, 2012 6:44 pm

Re: Close to Roth IRA limit should I do Roth or Back door?

Post by Tarabara »

Here is an update. I just did our taxes and we are over the MAGI limit so I am definitely glad i took advice and waited to make my Roth IRA contribution. So, according to my plan I will contribute to a TIRA now for 2014, and then convert it to a Roth. I think I am all clear on that. The part I am still not sure about is what to do about my spouse's excess contribution to Roth. I used TurboTax and it calculates that the excess contribution is $1140. So, should I withdraw $1140 plus the earnings on that or should I recharacterize it as TIRA? We are not going to convert it to Roth because she has other TIRA accounts in the mix. I am hoping Vanguard will know how to calculate the earnings on that portion? So which is better?
Thanks so much for help
TaraBara
Rose
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Re: Close to Roth IRA limit should I do Roth or Back door?

Post by Rose »

Bump to help getting answers..
Better2bWise
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Re: Close to Roth IRA limit should I do Roth or Back door?

Post by Better2bWise »

Tarabara wrote:By my calculations I think my spouse and I will be just under the Roth IRA limit of 181,000 MAGI but just by about $3,000. I have read all the wiki's and back door how-to's but still can't decide what to do. I would like to keep it simple and avoid the complication of doing IRA in one year and conversion in another, but if my calculations are off even a little I might end up having to recharacterize.
Here is some relevant info:
We are married filing jointly
We are both over 50
My spouse has been contributing to Roth IRA all through the year so if my calculation are off we will need to recharactierize that.
My spouse does have another traditional IRA we do not want to convert or roll over so she is not good candidate for doing back-door.
I do not have any other non-Roth IRAs. I have 401K and some inheritid IRAs which don't count so I can do back door w/out tax consequences

So, should I:

1. Contribute the $6500 to my Roth IRA this year. I like this because it is simple and it worked great last year (we were just under the limit then too.) When I do my taxes, if I discover that my estimates were wrong and we were over the limit I will have to recharacterize both my contribution and spouse's contribution. Then, could I do a Roth IRA conversion on my recharacterized in 2015 for 2014?? This seems complicated.

2. Or should I not even try to do a regular one and just do a back door Roth IRA contribution now in 2014 for me even though I very well may be under the limit? Then if we are over limit i will just need to recharactierize spouses's contribution?

Thanks for any input
If you wish you can make more 401K contribution so that your Roth Contribution falls under the income limit of MAGI. 401K can reduce your MAGI. https://ttlc.intuit.com/questions/25959 ... o-roth-ira
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